Assessment of Options Investments by Ranking Analysis

Sergey Izraylevich and Vadim Tsudikman

Why Is an Additional Analytic Tool Needed?

Generally, the evaluation of investment decisions is based on the comparison of realized profits (variability, drawdown, and other risk measures) with their corresponding expected values. While such an approach is appropriate for financial instruments possessing linear payoff functions, it has numerous drawbacks when applied to the evaluation of complex option combinations with nonlinear payoffs.

Different option strategies have various forms of payoff functions. In particular, the profit potential of option combinations related to different strategies can either be limited or unlimited. This feature complicates ...